Semiconductor Industry Analysts See Rational Capital Spending

Semiconductor Industry Analysts See Rational Capital Spending

Asia Leads Fab Investments

Half Moon Bay, California, January 9, 2007 -- Memory makers are driving the current semiconductor capital equipment spending cycle, with most of the action happening in Asia, according to a panel of financial analysts speaking at SEMI Industry Strategy Symposium (ISS) 2007 today.

“The 2007 opportunity is the memory business in Asia,” said Mark FitzGerald, senior analyst with Bank of America. “In terms of spending North America is starting to pale in comparison with what is going on in Asia.”

FitzGerald, who is traditionally bearish on the sector, surprised the ISS audience by saying he was optimistic on prospects for equipment companies because they have learned how to deliver “cross cycle profitability”.

Brett Hodess, a Merrill Lynch analyst, said Asia now accounts for 43 percent of global capex spending and over the past 10 years the region has doubled as a percentage of worldwide capex.

While memory makers are the big spenders, the foundries have cut back. Since the 2000 peak, memory capex in Asia has doubled while foundry capex spending has halved, according to Hodess. “At some point the foundries will have to pick up spending,” he said.

Stephen O’Rourke, analyst with Deutsche Bank, noted that Europe tends to lag other regions in both semiconductor consumption and capital equipment spending. “Asia is becoming the semiconductor factory of the world,” he said. However, one sector where Europe is taking the lead is in photovoltaic technology, he noted. O’Rourke also said that given the global nature of the semiconductor industry, European based equipment suppliers have “enormous opportunities” for growth.

Applied Materials senior vice president Tom St. Dennis, who moderated the financial panel, noted that the irrational capital spending of previous cycles is not evident in the current cycle. “It looks like a pretty responsible deployment of capital,” he said.

Hodess said the industry has “broken the chain of everybody spending at the same time,” which in the past has led to severe cyclic corrections. Effectively, there were different cycles for memory, foundry and logic. “We have companies investing in technologies at slightly different times,” he said.

Satya Kumar of Credit Suisse pointed out that there were now multiple memory products, not just DRAM, and multiple end markets. These factors provide a balance that reduces the risk of over-investment by the device makers.

St. Dennis of Applied Materials noted that the 300mm transition was a windfall for device makers in terms of productivity improvements. In particular, the foundries have been able to expand capacity without large capital outlays because of incremental enhancements in productivity provided by toolmakers.

The analysts were in agreement that fewer equipment startups in future would get to the IPO stage. “The capital cost of starting a new equipment company and taking it to IPO is prohibitive,” said O’Rourke. Rather, startups with proven technology would end up being acquired at an early stage by the larger, established players.

In the device market, the complexity of developing next generation technologies will effectively inhibit new entrants, according to some of the analysts. FitzGerald of Bank of America believes that in the future foundries are likely to face competition from established IDMs, not new foundry entrants. He also noted that the cost of design is a major challenge for the fabless semiconductor industry. “We will see more of these companies get folded into larger companies,” he said.

To end the session, moderator St. Dennis asked each panelist what company they thought would be the biggest device maker in five years. Samsung got three votes, and TSMC one vote.